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Nov. 3, 2021, 8:16 a.m. EDT

Here’s the math for Tesla’s stock price if it becomes the Apple of car makers

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By Andrew Dickson

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And dare I say that each of Tesla’s competitors will be loath to surrender more market share, thus the huge amount of R&D and capital spending they will devote to the upcoming transition to electric vehicles (EVs). On the CAPEX metric alone, we can see that these competitors will actually spend more next year than Tesla.

A lot more.

But still, let’s assume all the legacy automakers fail to maintain share. Let’s also envision that most of the profits in the industry will eventually go to Tesla (as they have in handsets to Apple).

As a baseline, analysts anticipate that Tesla will generate over $50 billion in sales this year. Over 85% of these sales are related to its automotive business.

In 2035, if EVs represents 95% of all new cars sold, and Tesla has the same 16% market share as Apple does today (significantly eclipsing that of VW or Toyota), it will be producing 22 million cars and light trucks, and generating sales of over $1 trillion.

This year, analysts anticipate that Tesla will generate nearly $7 billion in adjusted net income (which will include approximately $1.2 billion in profits driven by regulatory credits).

If Tesla were able to generate the same 24% net earnings margin as Apple does today (remember VW is at 5% and Toyota at 7%), then it would produce about $250 billion of earnings in 2035.

As Tesla has grown from zero to one million cars, it has built production facilities in Freemont, Shanghai and soon Austin; battery-producing gigafactories in Nevada, Buffalo, Germany and Austin again; and other manufacturing and tooling facilities in Michigan, Ontario, Shanghai, two more in California and three more in Germany.

To finance this expansion, Tesla went from 35 million diluted shares in 2009 to 641 million in 2015 to over 1.1 billion today. Of course some of these went to key executives in the firm as compensation, but for the most part, this share issuance helped to finance the firm’s stunning growth to date.

And if Tesla is going to build over 20 million units a year (up from about 1 million this year), this will require a lot more capital. But given its strong share price and internal cash flow generation, let’s assume that the rate of new share issuance at Tesla will slow dramatically, to just 1.5% new shares per year. At this rate, they would have “only” 1.4 billion shares in 2035.

And in that year, on production of 22 million vehicles at an average selling price of $46,000 (again, our guess) and doing 24% net earnings margins, this $250 billion of earnings would work out to about $178 per share.

Given Tesla’s domination in this scenario where it maxes out its market share, the only negative is that it would no longer be a secular story, but one more exposed to the cyclical nature of automaking. So its huge amount of revenue and income would naturally be growing much more slowly by then. But, again for the sake of this exercise, let’s assume that Tesla will still find a way to continue to generate a consistent 10% EPS growth on that $250 billion number.

And despite this slowing, let’s also assume that investors will want to pay a P/E ratio of over 20 for a now huge and cyclical business.

On a P/E of 22.5, that would work out to a market cap of $5.6 trillion, and a share price of $4,000.

These are big numbers. And despite what we hear from the more optimistic of the Tesla bulls, let’s also assume that today’s shareholders only hope to make 10% per year between now and 2035.

If we discount that $4,000 by 10% back to today, the shares are worth $1,050.

That is pretty close to where we are right now.

So all that above is what needs to happen for $1,050 to be a fair share price today.

Doubters, admittedly like us, will suggest that the execution risk is tremendous, and these market shares (and particularly the margins) may be impossible.

Yet, despite the fact that we actually can’t ignore the differences between the mobile phone and automobile industries noted above, the believers – who may indeed be right – will literally need to see Apple-esque industry dynamics, market shares and earnings margins for this all to make sense.

It is also important to consider that for there to be even more upside in the shares from current levels, Tesla will actually have to exceed everything that Apple has accomplished.

Whether a bull or a bear, there is no doubting that what Musk has achieved thus far has been nothing short of incredible. Five years ago, few would have thought it even possible that Hertz would order 100,000 Teslas in a single order for its car rental fleet, or that Tesla would produce and sell a million cars in a single year. 

He will continue to do incredible things.  He has changed the world and the mindset of his competitors. None of that is in question. The future that his share price is discounting is the question we are asking today.

Andrew Dickson is the chief investment officer of Albert Bridge Capital, a manager of concentrated equity portfolios for institutional investors. He holds holds no position in Tesla, long or short. Follow him on Twitter @albertbridgecap

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